Investment strategy can be defined as the set of rules, behaviors or procedures that are designed to guide an investor in selecting an investment portfolio. Most strategies are designed around the risk return tradeoff of investors. Many investors would prefer to maximize the returns by investing in risky assets. Other investors might want to minimize the risks.
A well planned investment strategy is necessary before any investment decision can be made. These strategies are designed to face the risks or challenges that the investment presents because the returns on investments are not clear. There are various types of investment strategies that can be formulated. Each type of strategy has its advantages and disadvantages. Before selecting a particular strategy, its benefits and demerits must be evaluated and analyzed.
A passive strategy attempts to minimize transaction costs. An active strategy on the other hand is used to maximize returns depending upon the market trends. It generally involves buying investment instruments when they are cheap and selling them when their prices rise. An active strategy is not very beneficial for small time investors.
Small time investors can adopt the buy and hold strategy to invest in equities. The investment in equities gives long term benefits and returns. This means that the investment has to be held for a long time. A strategy for investing in mutual funds is the best one if a person wants to make a profitable investment. Another strategy is the conventional type called value investing. In this a person buys the shares of the company as if he or she were buying the whole company without paying any attention to the stock market or to the other external factors.